Does fund manager tenure length matter?

Just as Joe Biden was inaugurated I received an interesting note from Interactive Investor. The email used the hook of Joe Biden being the oldest US President in history as a reason to look at the longest-serving fund managers out there and how they have outperformed the market.

The research piece stated:

Fund managers that have racked up the longest track records are likely to have done so in large part because good performance has kept them there.... it is interesting to see that eight out of ten of the longest serving open ended fund managers have outperformed their benchmark during their tenure (or as far back as comparable records will go).

It also contained the following chart detailing the outperformance of the fund managers in question over time (you can scroll right on the chart to see more data):

Unit trusts star managers

Manager	Fund name	Manager Tenure (years)	Effective	Performance from	Return	Benchmark	Benchmark return
Andy Brough	Schroder Institutional UK Smaller Companies	33	08/06/1987	14/09/1999	775.70%	FTSE Small Cap Ex Invest Trust TR GBP	213.8%*
Sue Round	EdenTree Amity UK	33	01/03/1988	01/03/1998	1144.60%	FTSE AllSh TR GBP	1,244.6%*
Geoff Hitchin	Marlborough Global Bond	33	05/08/1987	01/02/1990	1009.10%	BbgBarc Global Aggregate TR USD	596.0%*
Alistair Whyte	Aberforth UK Small Companies	30	29/03/1991	29/03/1991	2639.30%	Numis SC Ex Invt Com TR GBP	1519.50%
Robin Hepworth	EdenTree Higher Income	26	17/11/1994	09/12/1999	388.60%	FTSE AllSh TR GBP	140.5%*
Makiko Hakozaki	Russell Inv Japan Equity	25	30/06/1995	30/06/1995	219.60%	TOPIX TR	115.50%
Justin Abercrombie	Schroder QEP US Core	25	19/02/1996	19/02/1996	523.60%	S&P 500 TR	951.70%
Daniel J. Fuss	Loomis Sayles Multisector	23	01/07/1997	01/07/1997	504.50%	BBgBarc US Govt/Credit TR USD	313.90%
Austin Forey	JPM Emerging Markets	23	01/07/1997	01/07/1997	733.60%	MSCI EM GR USD	424.80%
Colette Conboy	SLI International Trust	Left 21/12/2020	01/11/1998	01/11/1998	580.70%	FTSE All World TR USD	464.50%

Obviously, the implication is that while few active managers outperform the market over the long term there are some who do and these enjoy the longest tenures as fund managers. The logic seems reasonable, just like the cutthroat world of football management, if a fund manager underperforms expectations (versus their benchmarks) they can expect to be moved on and a replacement found. This, of course, ignores the fact that some successful managers will be poached by other investment management houses but in reality movement of successful managers between houses is similar in frequency to star manager switches in football. It's rare. Employers will fight to keep their prized assets happy and well remunerated as long as they keep delivering results.

However, Interactive Investor's suggestion based upon the above table may seem valid but it does oversimplify the situation. It is well documented that very few managers outperform the market over the long term, as the compounding effect of their costs/fees proves a drag on long term performance. I spent a long time analysing the performance of the above 10 "star" managers throughout their respective careers and an interesting pattern began to emerge. My starting assumption was that during their career a fund manager should outperform or underperform in any given year at the same frequency, at least theoretically. I wanted to see if the supposedly best managers are consistently good throughout their careers or whether there is evidence of them resting on their laurels the longer their careers last.

Resting on their laurels?

The table below shows the number of years each 'star' fund manager outperformed their benchmark and peer group during the first 5 years of their career and then during the latest 5 years of their career. Where there is an asterix this shows that the data is from the earliest 5 year period in their career for which we have comparable data. I have coloured in red those managers who performed worse in the latter part of their career when compared to the start of it. Conversely, I have coloured in green those that have outperformed their benchmark more consistently during the latter part of their career.

Manager	Fund name	Number of years outperformed benchmark in first 5 years of career	Number of years outperformed benchmark in most recent 5 years
Andy Brough*	Schroder Institutional UK Smaller Companies	4	3
Sue Round*	EdenTree Amity UK	1	2
Geoff Hitchin*	Marlborough Global Bond	4	2
Alistair Whyte	Aberforth UK Small Companies	3	2
Robin Hepworth	EdenTree Higher Income	1	2
Makiko Hakozaki	Russell Inv Japan Equity	5	4
Justin Abercrombie	Schroder QEP US Core	1	1
Daniel J. Fuss*	Loomis Sayles Multisector	4	3
Austin Forey*	JPM Emerging Markets	3	4
Colette Conboy	SLI International Trust	5	2

You can see that out of the 10 star unit trust managers only 3 of them beat their benchmark more frequently in the last 5 years than at the start of their career. It's a slightly worse pattern when you compare the performance across their careers versus their peer group (i.e their sector average) as shown below. In this instance, only two fund managers beat their peers in recent history more consistently than earlier in their career.

Manager	Fund name	Number of years outperformed peer group in first 5 years of career	Number of years outperformed peer group in most recent 5 years
Andy Brough*	Schroder Institutional UK Smaller Companies	3	4
Sue Round*	EdenTree Amity UK	2	2
Geoff Hitchin*	Marlborough Global Bond	4	2
Alistair Whyte	Aberforth UK Small Companies	4	1
Robin Hepworth	EdenTree Higher Income	3	2
Makiko Hakozaki	Russell Inv Japan Equity	5	3
Justin Abercrombie	Schroder QEP US Core	2	2
Daniel J. Fuss*	Loomis Sayles Multisector	5	3
Austin Forey*	JPM Emerging Markets	3	5
Colette Conboy	SLI International Trust	4	2

In fact, only one fund manager Auston Forey, is setting new strides versus both his benchmark and peer group compared to early on in his career. The message seems to be that just because a fund manager has a long tenure and good long term performance record it doesn't mean that they have the Midas touch.

Of course this is a very small sample of managers, but it clearly challenges the assumption that their longevity is evidence of their ability to still outperform. Given the range of assets they invest in, from emerging market equities to global bonds, as well as their differing career start dates it is unlikely that market conditions are to blame for the difference. They can't all have started their careers during better periods for active managers when compared to the last five years. So what could be going on?

Fund manager behaviour at the start of their career

One thing I learnt from my career in the City is that fund houses and fund managers value fund ratings. Fund ratings are given out by rating agencies supposedly taking into account a whole range of criteria including performance. Personally, I don't think they are worth the paper they are written on, but for the fund houses they present a valuable marketing opportunity. They can place adverts in investment media highlighting the gold star rating from a certain fund rating agency in order to attract new customers. There has always been concern over the transparency of how some of these ratings are awarded and also their usefulness. There have been many examples of funds imploding, while still having a rating from a rating agency (Neil Woodford being an example).

Usually, a new fund launch has to have a three-year performance track record before it can receive an award/rating from a fund rating agency. On one occasion, when I still worked in the City, it was suggested that a fund manager who was coming towards the end of the first three successful years of running a new fund was mindful of the good rating he would imminently receive assuming nothing untoward occurred in the interim. As such, he effectively started to sit on his hands so as to not rock the boat until the date passed. Technically such behaviour means that it is debatable as to whether the manager was acting in his investors' best interests. Investors don't pay managers to sit on their hands and not invest their money. But what this does demonstrate is how conscious and aware fund managers are of the performance of their benchmarks and peers. As such their behaviour can evidently change throughout their career based upon what is going on around them.

The other thing to bear in mind is that it is far easier than people imagine to beat a benchmark over the long term.

How to beat any investment benchmark

Investors don't realise that it is, in fact, far easier to beat a benchmark over a long period of time than they realise. Firstly fund managers get to have a say in their benchmark, so setting the goalposts. Once you know your benchmark it is then a case of taking advantage of the mathematical wonder of compounding.

Let's say Manager A was trying to beat their benchmark. Let's assume that in the first three years they took excess investment risk in order to achieve their aim and ultimately secure the fund rating they desired. Let's assume that over that period the excess risk was rewarded and their fund grew at 8% per annum while their benchmark grew at 5% per annum.

If an investor had invested £100,000 with Manager A they would now have £125,970 compared to £115,760. Now let's assume that Manager A changed their fund so it started tracking the index as close as possible (a closet tracker) so that both the fund and the tracker grew at 10% per annum for the next 30 years. At the end of the 33 year period an investor investing in the benchmark will have £2,019,986. However, someone who invested with the fund manager would have £2,198,122. A difference of almost £178,000. Small differences in the first three years compound into big differences later on.

So as an investor if you want to beat any benchmark in the world over the long term, simply invest aggressively until you are ahead, and then track your benchmark and let compounding work its magic. Fund managers will be well aware of this strategy

Career risk vs investment risk

Interestingly if you take the above observations in the round there is a likelihood that a fund manager in their early career will take excess risk to beat their benchmark, attain a rating, but then be so mindful of their benchmark that they start playing it safe and rest on their laurels. The compounding of their earlier success means that their long term outperformance is assured, which leads to an even longer tenure.

This closet tracking may not necessarily be conscious either. When I learnt to drive my instructor once pointed out that if you look at something out of the corner of your eye or the side window for too long you subconsciously start driving towards it. The same danger is true when investing with one eye on a benchmark or your peers, that is that you are in danger of veering towards them and tracking them.

The above analysis does little to dispel the idea that fund managers start to rest on their laurels later in their careers, while compounding their earlier successes to beat their benchmarks. So rather than a long tenure being the result of strong long term outperformance, it is likely to be the cause of it. So we should pay little heed to long term investment performance figures over the length of a manager's career.

Yet investing media is obsessed with this long term performance statistic. The national media used to regularly praise Neil Woodford, citing that during his 26 years at Invesco he turned £1,000 invested into more than £25,000. But that gave no insight into whether Neil Woodford was worth investing in during the latter part of his career. 80-20 Investor members knew that his funds weren't worth investing in, but those who followed the newspapers' logic of long term monetary returns eventually got caught up in the collapse of Woodford's empire. Woodford no longer had his long term track record from his Invesco days with which to promote his new funds when he set up his own investment management company. So effectively he was back to square one with a new fund launch. He obviously didn't play it safe and took excessive risk with his new fund which ultimately backfired. Perhaps it is the perfect illustration of what I'm describing, but where early-stage risk-taking following a fund launch went wrong.

All of this does little to dispel the notion that fund managers can get sucked into mitigating career risk more than they do investment risk.

Summary

So to sum up, while the sample size is small and therefore any findings not conclusive, the evidence suggests that:

• among fund managers there is a propensity to take more risk in the early stage of their career in an attempt to outperform only then to rest on their laurels
• a long fund manager tenure is not the result of strong long term outperformance but the cause of it as the manager benefits from the effect of compounding on early successes
• fund managers are less likely to outperform their benchmark or their peers later in their career
• long term outperformance has no bearing on short term performance

So as investors it pays to ignore the hype that surrounds star fund managers and instead objectively analyse investment performance over different and shorter time frames as well. In a past research piece I looked at whether "fund manager performance was purely down to luck?" and one of the conclusions was that "investing is like a game of poker. There is clearly an element of skill and plenty of luck involved. However, the best players stack the odds as much in their favour as possible. It's a case of knowing when to fold and when to stick". The analogy still holds when looking at who wins the long game in investment management, it's those who don't go all in and know when to just limp along and protect the chips they've already won.